Assume that Rio Ltd commences operations on 1/7/2012. It explores two areas and incurs the following costs:

Assume that Rio Ltd commences operations on 1/7/2012. It explores two areas and incurs the following costs: Exploration & Evaluation Expenditure ($m) Site X 12 = (8 + 4) Site Y 16 = (10 + 6) Total 28 Other information:

? Financial year ends at 30 June

?In the year of 2014, oil is discovered at Site Y.

? Of Site X, $8 million relates to tangible assets, $4 million intangible assets.

? Site X is abandoned as no prove of existence of economically recoverable resources, and an impairment loss is recognised

? Of the $16 million of Site Y, $10 million relates to tangible assets, $6 million intangible.

? Development costs of $14m are incurred at Site Y - $9 million are property, plant and equipment, $5 million are in intangibles.

? Development at Site Y concludes at the end of 2014 financial year, production commences at the start of July 2015.

? Development costs - are to be written off on a production basis in 2014 for Site Y.

? It is estimated that Site Y will produce 8 million barrels of oil. The current sale price is $50 per barrel.

? In 2015, 1m barrels are extracted; production cost is $3.8 million. Sales for 2015 are 800,000 barrels

Required: a) Prepare the journal entries for the costs incurred 2013, 2014 and 2015 (using the areaof-interest method of accounting). (15 marks)

b) Explain the difference between Area of Interest method and Full-cost method? (2 marks)